Investing 101 - The Law of Average and You

 
 

You are smarter than you know when it comes to most things in life, including investing, and if you apply some basic truths you will prove this to yourself.

Simple truths about investing:

●        Don’t overthink it. It is easy to get analysis paralysis. There are so many variables to investing, you could die of old age before you could figure it all out. Keep it simple. Go with a plan that beats the average. The average is the index you are investing in. Most professional fund managers don’t, so if you have one or buy into a process that does you’ll do far better than most.

●        A major key to investing is time. The younger you are when you start the better.

●        Contribute regularly, regardless of the market conditions. This is dollar cost averaging, and the smaller your accounts, the more impact it has.

●        Just like shopping for your favorite food, if it is on sale, you buy more. The same truth exists with investing regarding the general stock markets.  When they fall in value is the time to buy more, not sell. 

There is no rocket science in any of the above statements. I think we would all agree that the majority of adults and even children could understand them.  This is likely the clearest evidence you are smarter than you think you are. Herein lies the rub. You know what to do, but will you do it? Odds are stacked against you that you won’t, even when you know you should.  It is often our intelligence that stops us from doing the basics that are so necessary. 

The real question is NOT about your IQ, but what is it that is preventing you from doing what you need to do?  And this isn’t with just investing, it’s with everything in your life.  With investing, in my opinion, part of what stops us is due to overconfidence.

Rather than doing the things like regularly contributing to your saving you believe you will figure out a short cut to go from rags to riches sooner rather than later. You delay, and you delay, and one day you look around and you and the world have changed.

You are older, much older. Hopefully you figured out the short cuts, most didn’t. But hey, there’s still time….

Many resign themselves to the fact that they are like most, average. Yes, you will be average and it is average thinking that will keep you average.  Nothing wrong with being average, you will have lots of company, and some very good company. But for most, average happens when we settle and stop the effort to be better, to want more and to be more.  Settling seems more of a challenge than not settling, given the downside.

Most of our playbooks for life started developing as soon as someone yelled NO at us. Then we, like most, muddled though until we could literally stand on our own two feet and be 100% responsible for our lives.  If you are, good on you.  If you’re not, then you still have some core work to do. 

You have met the first test of real life when you look after the following for yourself; food, clothing and shelter.  But like our cavemen relatives not long ago, a full belly and a place to sleep was no guarantee of a safe tomorrow. Our ancestors didn’t have the options we have today, they got to live another day if they met the basics the day before. Then they had to keep doing this until they met their fate.  Because we’ve evolved so far from our ancestors we don’t have to suffer their fate of having to live by our cunning and strength every day for our entire lives. 

The evidence is in, it isn’t our lack of IQ that holds many of us back. Because we are so smart, and we can see so many options, we seem to be able to fool ourselves into a false reality that everything is OK and will work out. Consequently, we dismiss some very basic concepts in life that are often core building blocks for a life well lived.

My advice, simplify your life, understand the importance of the basics and look after yourself for beyond today. By doing what most don’t, will pull you away from average. Just make sure the pull is in a good direction.